Tame the oil speculators

Tuesday

The news may be that gasoline prices finally are declining, but the question remains what it was three years ago: Why did prices get so artificially high?

According to AAA, the average price in this area for a gallon of regular is roughly 12 cents less than it was a month ago. Still, the price remains roughly 70 cents above a year ago, and no one would argue that the economy has zoomed. Generally, a stronger economy pushes up demand for energy, pushing up oil and gasoline prices.

U.S. Sen. Bill Nelson, D-Fla., has been suspicious about oil price bubbles since mid-2008, when crude hit a record $145 per barrel six months after the Great Recession had started and just weeks before the markets crashed. Oil trading is notoriously secret, but The Wall Street Journal recently reported that banks and hedge funds, which never intended to take delivery on the oil, bid up the price in 2008 to profit at the expense of airlines and utilities that actually use the oil. Analysts for Goldman Sachs and Morgan Stanley, two of the biggest financial players, regularly predicted higher prices, without disclosing their interest.

So Sen. Nelson and others have filed legislation to reduce the influence of oil speculators. Their bill would limit any investor to 5 percent of the market and cap overall speculation at a 25-year average, or roughly since trading of oil futures contracts began. Supporters believe that the legislation could cut speculation from about 45 percent to 20 percent, lower the price of oil 25 percent from its current $85 and return "fundamental supply and demand" to the oil market. Industries that use oil still could hedge their bets. Regulators may soon announce their own proposed rules.

Previously, Sen. Nelson tried to require that speculators put up more "margin," essentially a down payment on a contract, to discourage in-and-out speculation. An aide said the new plan would be more effective, and has a better chance of passing. The oil industry and investors defend unregulated speculation, arguing that it keeps the market liquid and helps retirees. Any benefit to pension funds, however, is more than offset by the damage to the overall economy. The 2008 bubble, for example, helped push GM and Chrysler to the point where Congress bailed them out.

Even in March 2010, when gasoline was less than $3 per gallon, skeptics contended that the price of oil should have been 50 cents lower. To help the nation recover, Congress must end practices that benefit a few but hurt the many. Oil speculation is a good place to start.

- Randy Schultz,

for The Palm Beach Post Editorial Board

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